The dollar sank as news of the newly formed Greek coalition trickled through to markets Wednesday. The combination of New Democracy and former socialist rivals Pasok has ended seven weeks of uncertainty over which party would supposedly sail the Greeks to financial safety, and served to bolster the euro.

"Greece has a government," Evangelos Venizelos, head of the Socialist PASOK party told reporters after talks with conservative leader Antonis Samaras, the winner of Sunday's election. In the wake of the agreement being announced, the EUR strengthened against most of it major counterparts, with EUR/USD rising 0.16 percent to hit 1.2704 on live forex charts during afternoon trade.  “The outlook here is bullish above 1.2630 intraday support, for a break through 1.2731, towards 1.2820”, wrote Deltastock.com analyst Stoyan Mihaylov, pointing to 1.2435 as support.

Former ruling party Pasok agreed to support election winners New Democracy in parliament; but with just 42 percent of Greeks having voted for pro-austerity ideals - and given the two parties’ history of confrontation – there is still concern that the government will struggle to pass some very difficult laws. "It will be a very weak coalition," said Nikos Konstandaras, managing editor of leading conservative daily Kathimerini. The challenge now is to keep this coalition together – whilst trying to renegotiate the harsh measures associated with a EUR130bn bailout deal agreed in March with the EU and IMF.

Euro gains

But despite the questionable long-term success of the newly founded partnership, the EUR has benefitted from the palpable sense of relief in markets. The euro rose to a two-day high against the yen after the announcement and rose 16 percent against the greenback. The inability of election winners New Democracy to form a government would have left responsibility on the shoulders of Pasok, and eventually in the hands of left-wing extremists Syriza, increasing the chances of a much-feared disorderly Grexit from the euro zone.

The news of the New Democracy/Pasok coalition served to boost the shared single currency further, on top of gains in the morning session. The initial push came on the news that German Chancellor Angela Merkel had softened her approach to ‘debt sharing’ amongst euro zone nations. The EUR also made ground on gathering speculation over the likelihood of Fed intervention in the US.

Intensive care

“Europe has just about been revived by news of a shift in stance from Chancellor Merkel towards assisting the Southern Europe States and rumours of more easing in the US”, said Andrey Dirgin (pictured), head of research at Forex Club. “This is encouraging for markets and the euro, but there’s no doubt it is still in intensive care and will need a lot of nurturing to get back to health.”

And nowhere will need nurturing more than Greece throughout the next few weeks. Despite the announcement of a new government, many traders and commentators are suspicious of the coalition’s ability to follow through on what will be some difficult measures to implement. "What is needed is more decisiveness in swiftly implementing the measures which have already been agreed," German Finance Minister Wolfgang Schaeuble told the weekly Die Zeit in an interview.

Vocal Twitter users have also been bombarding the social networking site with 140 character testimonies of market sentiment. “Six wasted weeks, ND - PASOK - Dem Left had combined 169 seats after the May 6 elections, 179 now #Greece2012”, pointed out @YannisMouzakis. While @spygun said: “Greece: So it looks as if Venizelos will be back in Government. Once again, the Greek voters have rearranged the deckchairs on the Titanic.”

Investor eyes will now be turning to the US for any indication of further easing measures to be implemented by the Fed. The dollar index, which tracks the performance of the greenback versus a basket of six other major currencies, was down 0.17 percent, to trade at 81.48 at the time of writing, with investor expectation for further intervention of some form riding high.

Sarah Cox. Markets Writer, ForexSpace.com